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2017 FHA Versus Conventional Loans


2017 FHA Versus Conventional Loans: Educated Decisions

If you are going to be looking for a mortgage in the near future, then this article on 2017 FHA Versus Conventional Loans is the right place for you to start.  We are going to go into details about both sets of loans and the guidelines that they enforce.  It is smart for prospective borrowers to do their homework on the various types of loans that are available to them in order to allow them to make the right decision on a loan program.  However, when dealing with Loan Consultants you will not be forced to make this decision on your own as we have professionals waiting to speak with you, evaluate your situation, and offer our opinions as to the options you are facing and what makes sense.

2017 FHA Versus Conventional Loans: Oversight

Both sets of loans have regulation agencies that oversee the implementation of guidelines to ensure lenders have the proper guidelines in which to originate their loans and borrowers also have the materials that show them what it is going to take for them to get approved for the loan.

FHA Loans are overseen and insured by the FHA or Federal Housing Authority which reports up to HUD or the U.S. Department of Housing and Urban Development.  HUD releases a handbook entitled the HUD 4000.1 Handbook which is a large book that goes over all the rules and regulations that are involved with FHA Loans and most any situation that may arise.

Conventional Loans have 2 different regulatory entities that work together to create the guidelines needed to obtain their loans and they are Fannie Mae and Freddie Mac.  These 2 are both GSE’s or Government Sponsored Enterprises which develop and enforce the guidelines needed for Conventional Loans.  Conventional Loans are also called Conforming Loans since they must conform to Fannie Mae and Freddie Mac guidelines.

2017 FHA Versus Conventional Loans: Credit Scores

One of the most important qualification factors for any loan program has to be credit scores.  Your FICO credit score is also one qualification that most borrowers are familiar with prior to applying for a loan.  The one thing that may be a surprise to a borrower is the difference between what they think their FICO score is and what it actually is when being pulled by a credit reporting software.  When lenders pull your FICO score it is done with an algorithm that is created for mortgage borrowers which could vary significantly from what is seen online or what a car dealership will pull on you.  Given this, here are the credit scores needed for both sets of loan programs.

FHA Loans: When it comes to credit scores required for an FHA Loan there are 2 different sets of scores in place in order for you to get a loan.  First of all, if you have a 580+ FICO, you are able to obtain a mortgage with only a 3.5% down payment.  Now if you have a FICO score of 500-579 you can get an FHA Loan but you will be required to put 10% down plus compensating factors to strengthen your case.

Conventional Loans: The minimum credit score for a Conventional Loan per Fannie Mae and Freddie Mac is 620 FICO, however a lot of the times you are going to run into lenders who are going to require a 640+ FICO score.  If you run into this, this is called a Lender Overlay which in short is additional requirements you must adhere to in order to get a loan with that specific lender. You can rest easy knowing that when you come to Loan Consultants we will lend to the loan program’s minimum guidelines without any lender overlays in place.

2017 FHA Versus Conventional Loans: Debt To Income Ratio

When it comes to Debt To Income Ratio or DTI Ratio for short, this is a vital guideline you need to know as it determines if you can financially support a mortgage with all your existing debt.  How your DTI Ratio is calculated is by taking all your monthly debt obligations which include credit card payments, student loans, and car loans, you add your proposed mortgage payment to this,  and then you divide it by your gross monthly income.  What this doesn’t take into account are your utilities and other payments that aren’t found on your credit report.

FHA Loans: These loans have 2 different DTI Ratios that are put into place and it all depends on the FICO score used to qualify for the loan.  If your FICO is 620+ you are able to have a 56.9% DTI Ratio but if your FICO is below 620 you will only be able to have a 43% DTI ratio.  As you can see, having a weaker credit score can cost you significant buying power when looking for a home.  This could mean the difference between a $200,000 home and a $250,000 home.

Conventional Loans: Depending on if you are going with a Fannie mae or Freddie Mac backed loan will determine the DTI ratio you are going to be able to have.  For Fannie Mae products you are only able to have a 45% DTI Ratio whereas with Freddie Mac products you are able to go as high as 50% DTI ratio.

2017 FHA Versus Conventional Loans: Mortgage Insurance

You should know that if you are looking at mortgage insurance in the 2017 FHA Versus Conventional Loans discussion you will find that both loan programs have a mortgage insurance but there characteristics couldn’t be any different.

FHA Loans: First of all FHA Loans at closing have an Up-Front Mortgage Insurance Premium which is calculated as 1.75% of your loan amount and this is rolled into your loan amount and subsequent mortgage payment.  Also, there is a Mortgage Insurance Premium or MIP which is paid monthly and it equate to 0.85% of your loan amount divided by 12 months and this payment is rolled into your mortgage payment.  Now as long as you have the FHA Loan, you will be required to pay the monthly MIP.

Conventional Loans: Private Mortgage Insurance or PMI is what is included when you have a Conventional Loan.  Now this differs from FHA Loans in a few ways and the first way is it varies depending on the LTV of the loan.  For example, a loan with a 95% LTV will have a higher PMI than a loan with an 85% LTV.  Now the other difference is once LTV is under 80%, PMI is automatically cancelled since there is sufficient equity in the home.  There are also options at closing to avoid PMI by obtaining Lender Paid PMI.  This is where lender credits and borrowers funds can be used to prepay the PMI for the loan and you don’t have to worry about the PMI monthly payment.

2017 FHA Versus Conventional Loans: Bankruptcy and Foreclosure

The 2017 FHA Versus Conventional Loans wouldn’t be complete if we didn’t look at the different ways that these programs treat derogatory items on your credit like bankruptcy, short sales, and foreclosures.  With each action there is a mandatory waiting period associated with it and the times vary greatly between both loan programs.

FHA Loans:

  • Chapter 7 Bankruptcy: 2 year waiting period after discharge date
  • Chapter 13 Bankruptcy: No waiting period required here as long as you have made at least 12 monthly repayments on time.  If you receive approve from your trustee you are also able to obtain an FHA Loan the day after your discharge date as well.  If you are going this route, a manual underwrite will be necessary in order to get your loan processed and to closing.
  • Short Sale: 3 year waiting period after recorded date or sheriff’s sale date
  • Deed-in-Lieu of Foreclosure: 3 year waiting period after recorded date or sheriff’s sale date
  • Foreclosure: 3 year waiting period after recorded date or sheriff’s sale date

Conventional Loans:

  • Chapter 7 Bankruptcy: 4 year waiting period from the discharge date
  • Chapter 13 Bankruptcy: 2 year waiting period from the discharge date or a 4 year waiting period from the dismissal date
  • Short Sale: 4 year waiting period from the recorded date
  • Deed-In-Lieu of Foreclosure: 4 year waiting period from the recorded date.
  • Foreclosure: 7 year waiting period from the recorded date

2017 FHA Versus Conventional Loans: The Choice Is Yours

As you can see, there are many of differences between FHA Loans and Conventional and hopefully this 2017 FHA Versus Conventional Loans helped you in making the decision of which loan you are going to go with.  I guarantee that you won’t know everything there is to know about these loans, so that’s why I want to offer my service to you any day of the week at 888-900-1020 and I can work directly with you to ensure that you are taken care of and your loan questions are answered in full.  I always want my borrowers to be 100% confident with their decision and a lot of the times just reading an article isn’t enough.  You just need to remember that Loan Consultants does not have lender overlays and we will make loans to the minimum guidelines no questions asked.  What else we will do for you is close your loan in as little as 21 days and most loans are closed by 30 days.  We have streamlined operations here where the sooner we can get your loan closed the better unlike other lending institutions who may try to get you closed in 30 days and end up taking 45+ days.  Please reach out today and we can get started.

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